Titan: Too Good to be True

Analysts re-rate stock as valuations look rich, FY12 growth expectations moderate

Over the last 12 months, the share price of Titan Industries has jumped 93 per cent. It has returned 200 per cent to investors over the past 18 months. No wonder, then, it is the favourite pick of many a bull. Sustained outperformance can at times lead to rerating, as is the case with Titan. With the share price rising so fast, brokerages have done so as they believe future upside has been factored in. 

However, the stock price has moved on strong fundamentals and an even stronger performance. Titan delivered 40 per cent top line growth, 50 basis points of Ebitda (earnings before interest, taxes, depreciation and amortisation) margin expansion (despite a one-off staff payment) and 72 per cent earnings growth in financial year 2010-11. The unexpected growth in its jewellery and watch business resulted in earnings upgrades in 2009-10 and 2010-11. The stock’s inclusion in the MSCI Index gave it further momentum. As a result, Titan’s one-year forward price/earning multiple has risen from 18x in February 2010 to over 33x now.

The company’s aggressive retail plans are evident from its presence on the high streets of Mumbai, Delhi and Chennai. It has a capex plan of Rs 200 crore lined up this financial year. Given the growth expectations, analysts have a 12-month target of Rs 4,750 for the stock (closed at Rs 4,288 On Wednesday).

The reason for the muted growth in stock price is not only stretched valuations, but operations headwinds, too. One of the things that could affect earnings is the sharp rise (50-60 per cent) in diamond prices over the past six months. This has caused the price of studded jewellery to rise sharply, relative to gold jewellery. This will, in turn, create a headwind for the high-margin studded jewellery segment. Additionally, the Street believes the CBDT’s recent notification requiring consumers to quote their permanent account number (PAN) for purchasing jewellery over Rs 500,000 will have an incrementally negative impact on Titan’s jewellery sales, even as sales with this ticket size would account for 10 per cent of the total. While this may not be a huge risk at this point, it will be a definite factor for organised players like Titan.